May 21, 1998 The Honorable ThomasJ. Koerber Secretary Governors of the United States Postal Service 475 L’Enfant PlazaWest, SW. Washington,DC 20260 Re: Docket No. R97-1, PostalRate and Fee Changes,1997 Dear Mr. Koerber: The Alliance of Nonprofit Mailers (“ANM”) respectfblly submits its comments under39 C.F.R 8 9.2 on the May 11Opinionand Recommended Decision of the Postal Rate Commission. For the reasons set forth in ANM’s post-hearing briefs to the Commission,adoption of the rates recommended by the Commission would violate 39 U.S.C. Q3621 ef seq.’ Rather than repeatits arguments in those briefs, ANM incorporatesthem by reference. In thesecomments, ANM makes two additional points. ’ Initial Brief of ANM (April 1, 1998); Joint Reply Brief of ANM, American Library Association and Coalition of Religious Press Associations on Revenue Requirement (April 10, 1998); Initial Brief of ANM, American Business Press, Coalition of Religious PressAssociations, Dow Jones & Company,Inc., MagazinePublishers of America, National Newspaper Association, the McGraw-Hill Companies, Inc., and Time Warner Inc. (April 1, 1998); Reply Brief of ANM, American Business Press, Coalition of Religious PressAssociations, Dow Jones& Company, Inc., Magazine Publishers of America, National Newspaper Association, the McGraw-Hill Companies, Inc., and Time Warner Inc. (April 10, 1998).
Transcript
May 21, 1998
The Honorable Thomas J. Koerber Secretary Governors of the United States Postal Service 475 L’Enfant Plaza West, SW. Washington, DC 20260
Re: Docket No. R97-1, PostalRate and Fee Changes, 1997
Dear Mr. Koerber:
The Alliance of Nonprofit Mailers (“ANM”) respectfblly submits its comments under 39 C.F.R 8 9.2 on the May 11 Opinion and Recommended Decision of the Postal Rate Commission. For the reasons set forth in ANM’s post-hearing briefs to the Commission, adoption of the rates recommended by the Commission would violate 39 U.S.C. Q3621 ef seq.’
Rather than repeat its arguments in those briefs, ANM incorporates them by reference. In these comments, ANM makes two additional points.
’ Initial Brief of ANM (April 1, 1998); Joint Reply Brief of ANM, American Library Association and Coalition of Religious Press Associations on Revenue Requirement (April 10, 1998); Initial Brief of ANM, American Business Press, Coalition of Religious Press Associations, Dow Jones & Company, Inc., Magazine Publishers of America, National Newspaper Association, the McGraw-Hill Companies, Inc., and Time Warner Inc. (April 1, 1998); Reply Brief of ANM, American Business Press, Coalition of Religious Press Associations, Dow Jones & Company, Inc., Magazine Publishers of America, National Newspaper Association, the McGraw-Hill Companies, Inc., and Time Warner Inc. (April 10, 1998).
SIDLEY & AUSTIN WASHINGTON, DC.
The Honorable Thomas J. Koerber May 21, 1998 Page 2
1. Revenue Requirement The Postal Service’s tinancial performance during the most recent accounting
periods has continued to widen the gulf between the projected operating losses offered to justify rate increases, and the Service’s actual operating results. At the end of the rate case, the Service asserted that it would suffer an operating loss of approximately $1.2 billion in Fiscal Year 1998 (the test year chosen by the Service) without a rate increase. Through the end of Accounting Period 6, actual operating results were over $1.2 billion in swpltrs. In Accounting Period 7, the Service, having projected an operating profit of only % 62.8 million, enjoyed an operating surplus of $112.8 million. And it is common knowledge that Accounting Period 8 produced a surplus ofabout $68 million, far better than the projected loss of $47 million. See 37 Tr. 19910 (USPS financial plans). All told, the cumulative operating surplus through the first eight accounting periods now exceeds $1.1 billion.
Documents made public at the Board of Governors’ meeting on May 5, 1998 also confirm that the Postal Service’s expenditures on capital projects and manage- ment initiatives in FY 1998 are running far below the levels projected in the rate case. For example, according to a presentation by Michael Riley, the Service’s Chief Financial officer and Senior Vice President, “Year-to-date Capital Commitments for Postal Quarter II were $633 million compared with a budget of $1.4 billion.” See Attachment A, irea. It is no answer that these funds may ultimately be spent in FY 1999 or some later fiscal year. The Postal Service will also receive additional reverntes in FY 1999 and later fiscal years. The purpose of a test year in a rate case is to establish an agreed-upon period for comparing revenues and costs. Deducting more than one year of expenses from one year of revenue is completely illegitimate.’
’ The Postal Service often aspires to be treated in more respects like a privately- owned business. A private business that reported its taxable income by deducting more than one year of expenses from a single year of income would find itself in trouble with the IRS.
SIDLEY & AUSTIN WASHINGTON, DC.
The Honorable Thomas J. Koerber May 21, 1998 Page 3
Do the Governors really believe that the Postal Service, without a rate increase, would suffer losses in Accounting Periods 9 through the end of FY 1998 large enough to wipe out the $1.4 billion cumulative surplus, let alone drive the Service into a test year operating deficit of $1.2 billion? If so, the Governors owe the public a 111 and candid explanation of (1) how much the Governors now believe the Service would lose during the remaining accounting periods of FY 1998 if the existing rates were to remain in effect, and (2) the specific sources of those 1osses.s If not, then the rate changes recommended by the Commission violate 39 U.S.C. $3621, and must be rejected. Section 3621 entitles the Postal Service to break-even earnings, not monopoly profits.
2. Misattribution of Commercial Mail Processing Costs to Standard (A) Nonprofit Mail
The Commission’s May 11 decision recommended disproportionately high rate increases for nonprofit Standard (A) mail vs. commercial Standard (A) mail: 9.6 percent on average for the former vs. 1.2 percent for the latter. This discrimina- tory treatment cannot be excused by the vagaries of attributable costs or the dictates oftheRevenue ForgoneReform Act of 1993. Rather, these disparities stem in large part from a misattribution of commercial mail processing costs by nonprofit mail.
As ANM noted in the proceedings below, the reported cost data for nonprofit mail are tainted with IOCS tallies for mail with nonprofit markings entered at commercial rates. In determining the total mail processing costs attributable to nonprofit mail, the costs of processing these pieces are attributed by the IOCS to
3 To the extent that the losses projected for the remaining accounting periods include expenditures on the Service’s various capital spending projects and management initiatives, ANM specifically requests that the Governors explain how the depreciation or amortization rates applied to those expenditures to determine the amounts charged as expenses to N 1998 have been properly matched with the periods over which the Service expects that it or mailers will receive benefits from those investments.
SIDLEY & AUSTIN WASHINGTON, DC.
The Honorable Thomas J. Koerber May 21, 1998 Page 4
nonprofit mail. In determining z/nit attributable costs, however, these pieces are recorded by the R.W. as commercial mail.
In its Recommended Decision, the Commission found that this phenomenon overstated nonprofit attributable costs by an unknown amount. R97-1 Op. & Rec. De&. 71[ 5613-15. The Commission also found it ?mfortunate that the Service did not expend significant efforts to evaluate the matter until the Commission’s final ruling on the issue directed it to do so” (id. at g 5616). Had “the Postal Service produced the available data sooner, analysts may have been able to conduct a more meaningful analysis of the data, thereby better quantifying the extent of the misallocated nonprofit costs.” Id. at 7 1020.
The remedy offered by the Commission-an arbitrary one percent adjustment of‘total nonprofit attributable costs” (id. at fl5616)-does not cure the problem, for its magnitude is considerably greater. As the proponent of rate changes, the Postal Service bore the burden of proof 39 U.S.C. $ 3624(a) (incorporating 5 U.S.C. 5 556(d)). The actual level of attributable costs is a crucial element of any rate case-particular for nonprofit Standard (A) mail, for which Congress has dictated relatively low markups over attributable cost. If the record fails to quantify the extent of the cost misattribution, the remedy is not to guess at its extent, but to go back to the drawing board, perform a valid study, and measure the problem. ANM is willing to cooperate with the Postal Service in designing and performing a study. In the interim, however, rates so tainted with cross-subsidy cannot lawfully be implemented.
Respectfully submitted,
David M. Levy 4
Connsel for Alliance of Nonprofit Mailers
cc: R97-1 service list
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